The Ethanol Gasoline Tax

Source: By Editorial Board, Wall Street Journal • Posted: Sunday, May 16, 2021

The policy that is raising pump prices about 30 cents a gallon.

A gas pump offering ethanol or no ethanol gas in Des Moines, Iowa in 2020. Photo: brian snyder/Reuters

Gasoline prices hit a six-year high this week amid the Colonial Pipeline shutdown and a rebound in demand as more people hit the road. But one overlooked cause of higher prices at the pump is Congress’s ethanol mandate.

Economists aren’t the best at predicting how markets or technologies will evolve, but politicians are worse. In the 2007 Energy Independence and Security Act, Congress required gasoline sold in the U.S. to contain increasing volumes of “renewable” fuel—i.e., ethanol from corn, algae and cellulosic waste.

The bill, in its unwisdom, tasked the Environmental Protection Agency with assigning refiners and importers annual quotas for ethanol they must blend into gasoline or diesel fuel. The businesses get tradeable credits known as renewable identification numbers (RINs) for each gallon of renewable fuel. Those that don’t meet their quotas have to buy RINs from other parties to comply.

Congress’s ethanol requirements were never realistic, though its real goal was to boost corn farmers in the Midwest and the nascent “advanced” biofuels, which are still nascent. The blending mandates have become increasingly unattainable as fuel economy has improved, which is harming smaller refiners and pushing up gas prices.

Refiners are crashing into what’s known as the “blend wall”—i.e., the volume of ethanol that can be sold given existing cars and infrastructure. Warranties don’t allow older cars to run on ethanol blends higher than 10% because it can corrode engines. Ditto storage tanks and pumps at the gas station. The EPA has repeatedly reduced the targets—last year by 33% overall—though small refineries have still struggled to meet their quotas. Some spend more on compliance and RINs credits than on payroll, electricity and utilities.

As allowed under the law, the Trump EPA granted some small refineries “hardship” waivers from their quotas, only to be sued by the ethanol lobby. The Tenth Circuit Court of Appeals invalidated the waivers in January 2020. Afterwards RINs prices started creeping up as traders who buy and sell the credits anticipated more refiners would need credits.

RINs prices have been rising even more this year since the Biden Administration has signaled that it will ratchet up the ethanol mandates and issue fewer waivers. The Biden EPA also backed the Tenth Circuit’s ruling, which the Supreme Court heard on appeal in April. The Justices seemed conflicted over EPA’s discretion under the law to issue the waivers.

Hence, RINs prices shot up again. Corn prices have skyrocketed 125% in the past year, pushing up ethanol and RINs prices. RINs this week were trading at $1.90 per gallon, up from 15 cents in January 2020. Our sources estimate the ethanol mandate is adding about 30 cents a gallon to the wholesale cost of gas on average. The federal gas tax is 18.4 cents.

Meantime, since the blending requirements that Congress set end in 2022, the Biden EPA is now working on new biofuel mandates for subsequent years. The Obama EPA during its final months considered assigning RINs credits to electric-vehicle manufacturers and charging stations, which companies could then sell to refiners to boost their bottom lines.

Tesla has asked the EPA to revive the idea to help super-charge the electric-vehicle industry. Tesla already makes hundreds of millions of dollars each quarter selling regulatory credits that auto makers need to comply with fuel-economy mandates. Selling RINs credits would give EV companies another subsidy while raising costs on fossil fuels—i.e., drivers of gas-powered cars.

The renewable fuel mandate is a classic example of a policy that benefits a few who pay close attention while dispersing harm across the many. Congress ought to repeal it, but the ethanol lobby owns too many Members.